ii view: Bunzl shares surge amid demand for Covid products

A strong first half is not expected to be repeated over the next six months.

First-half trading update

• Revenue up 6%

Chief executive Frank van Zanten said:

"In these unprecedented times, I have continued to be immensely impressed by, and proud of, the dedication and resourcefulness shown by our employees throughout our business in responding to the challenging circumstances presented by the Covid-19 crisis.  Everyone, from our delivery drivers and warehouse staff to the expert sales people and customer service specialists, has worked tirelessly to ensure that we have been able to meet the urgent needs of our customers and frontline healthcare workers and support them in the supply of critical products required to fight the impact of the virus." 

"Our ability to respond quickly and effectively to such demands has been underpinned by the strength of our supply chain and our reliable, added-value sourcing operation in Shanghai which together have given our customers the confidence to trust their business with us."

ii round-up:

Distributor Bunzl (LSE:BNZL) today reported a 6% increase in first-half sales, boosted by demand for Covid-19 products such as hygiene items and personal protective equipment. 

Sectors such as grocery, safety and healthcare all helped fuel demand for pandemic items. On a regional basis, both Continental Europe and Rest of the World led the way, with North America and the UK & Ireland seeing slight revenue rises.

An accompanying management outlook comments proved more cautious. Covid-related product demand is not expected to be repeated in the second-half as many customers have already accumulated significant stockpiles. However, Bunzl shares bounced by 8% in early afternoon UK trading, recouping its share price loss year-to-date.  

Given better than expected trading, Bunzl now intends to repay employee-related government support packages and bring forward payment of tax deferrals wherever possible.

Bunzl customers include Walmart, Domino's Pizza and the National Health Service. It continues to make bolt-on acquisitions to help growth. In January, it bought Joshen Paper & Packaging, a distributor of packaging and other goods to customers primarily in the grocery sector. 

It bought 157 companies between 2004 and 2018 at a total cost of £3.3 billion. The US remains its biggest market generating around three-fifths of sales, followed by Continental Europe at around one fifth. 

ii view:

Diversification in the products it distributes, business sectors its serves and geographical locations it operates across prove a core strength at Bunzl. In addition, a strategy to grow both organically and by focused acquisition has to date served shareholders well. 

Covid-19 has to date been broadly positive for Bunzl. Pandemic demand across grocery and generally higher profit margin safety, cleaning & hygiene and healthcare sectors has more than compensated for declines in profitability at both lower margin foodservice and retail sectors. 

For investors, slowing organic growth and reduced acquisition activity over 2019 offered some prior reason for caution. The cancellation of the final 2019 dividend payment, given outlook uncertainty, also now dents what was previously an enviable growth record. But a payment to replace the cancelled 2019 final dividend could still be made, while broker Morgan Stanley expects some modest upgrades to full-year profit forecasts. For now, and following today’s positive update, Bunzl shares look to be up with events.  

Positives: 

• Diversified customer type and geographical location
• Brexit protection - over 85% of revenue is generated outside the UK 

Negatives:

• Management caution expressed for the outlook
• Reduced profitability for both foodservice and retail sectors

The average rating of stock market analysts:

Strong hold